Actual vs. Applied Manufacturing Overhead Costs
Actual MOH Costs
manufacturing costs are those that you spent under an accrual accounting system.
They are the costs incurred, whether you paid for them or not. A company
classifies these amounts as expenses because they are expired. For our purposes,
we put them into one big expense account called 'Manufacturing Overhead'.
Applied MOH Costs
is the amount you take out of the 'Manufacturing Overhead' account (based on an
estimate of activity for the year), and add to the work in process account as
production takes place. It is an estimate because you don't know how much the
actual will be until you get to the end of the year. To calculate, take
estimated MOH and divide by whatever
estimated activity the company has decided to apply
it on, such as direct labor hours, direct labor cost, or machine hours. This
gives you the pre-determined overhead rate. Note that 'pre' means before, so
this rate is calculated at the beginning of the accounting period. Since you
never know actual at the beginning of the period, you must always use estimated
to get the rate. Then you 'apply' it each time one of
the activities occur, such as each time one of the direct labor hours, direct
labor dollars, or machine hours, is incurred on a job or product.
The difference between the actual (how much you spent) and applied (how much you added to jobs based on what you thought you would spend) is called the overapplied or underapplied amount. If you applied less than actual, you have underapplied. If you applied more than actual, you have overapplied.
up accounts like we did in class with the accounting equation.